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October 14, 2011

What’s Your Practice Worth? FP Transitions’ Latest Findings

Demand for practices rising, say Grau Jr. and Sr., even as prices slip

Marketplace demand for advisory practices is rising, said David Grau Sr. and Jr., while prices for practices are slipping. Speaking Friday at the Fusion Advisor Network national conference in Las Vegas, the two principals of FP Transitions, which runs a matchmaking service for buyers and sellers, pointed out that advisory practices are still selling at higher multiples than other professional practices, such as architecture or medical practices.

As part of the Graus’ presentation, Fusion subsidized firm valuations for 17 Fusion practices that were delivered during the conference (FP Transitions’ usual cost for a valuation is $1,095), which Grau Jr. used as the basis of a comparison between the average Fusion practice and its peers.

For example, some 94% of the 31 Fusion practices that FP Transitions has done valuations for over the years use a CRM system (not Microsoft Outlook), a much higher percentage of its peers (determined by annual GDC), and that high adoption rate is just one of the positive metrics that FP Transitions uses in its valuations.

Among the other metrics that add value to a practice, Grau Jr. said, were:

A higher number of licensed employees in a firm;

A greater amount of client contact;

A higher amount of recurring revenue;

A greater amount of client affluence.

The factors that can detract from a firm’s value, he said, were:

A lack of nonsolicitation agreements for employees;

A higher-than-average client age, such as when the average age is in the 65-70 range;

A greater amount of asset concentration among clients, such as when a firm falls prey to the Pareto 80/20 rule;

The amount of personal branding, such as when a firm’s name includes the principal’s name.

Grau Jr. said that it can be a positive or negative for a potential buyer when a firm has a strong niche, even if it helps the firm’s annual bottom line.

Providing some historical context for a discussion of the current market for advisor firms, Grau Jr. said the current range of valuations for firms is in the 1.3 to 6.0 times recurring income range, with the average of deals done in 2010 at 2.31 times recurring income. Last year, there were 51 buyers for every seller, though he noted that in some markets, like California, the ration could be 85 to 90 buyers for every seller. The average time on market was 12 weeks, and the average seller’s age was 57.

A full 97% of deals were seller financed, including an average down payment of 29% with the remainder financed with a promissory note, with a 5% interest rate, and an average five-year buyout. “Clients are the ultimate deciders” of a potential deal’s success, Grau Jr. said, noting that the average retention rate of clients following a transaction was 95%, and that revenue generated from existing clients post-sale often rose to 110% to 120% of revenue prior to the transaction.

In planning any possible transaction, Grau. Jr. said “you have more choices the earlier you start the process,” which will preclude the most common scenario from happening: that an advisory firm “rides it directly into the ground” without a succession plan.